In December, the index of prices of goods and consumer services dropped by 0.5 percent compared to the analogous period last year – such are the preliminary estimations made by ZUS. – Deflation processes are slowly dying down, albeit much slower than one could expect them to. Actually, in a month to month perspective, the price decrease deepened. Fuel and food remain relatively cheap and base inflation indices sustain very low values. In light of this, the macroeconomic premises of the 2016 budget appear increasingly detached from reality – comments expert of Employers of Poland Łukasz Kozłowski.
Yet again deflation proved stronger than expected. The low base from last year should facilitate a gradual increase in price dynamics, but the drop in raw material prices and a rapid strengthening of the Polish currency in the second half of December had an inverse impact. The lack of particularly strong wage pressure and a still relatively weak – for a time of an economic upturn – consumption are also contributed to the fact that no significant inflation impulse has appeared yet.
Therefore, the government’s budgetary prognoses based on excessively optimistic macroeconomic assumptions, are seriously in question. Slower prices growth has a negative impact on budgetary income dynamics, particularly when it comes to indirect taxes, which increases the risk of exceeding the established deficit limit. Prolonged deflation may also convince the Monetary Policy Council to cut interest rates. Although monetary policy instruments should be applied appropriately in advance rather than in reaction to current events and the price drop is also caused by factors beyond the control of monetary authorities, one should also keep in mind that the attitude of the new members of the Council while most likely be more dove-like than before.
Łukasz Kozłowski, economic expert of Employers of Poland